India’s economic growth has long relied on healthy bank credit. While the credit growth has been quite volatile in the last three decades, the growth of 11 per cent registered in 2024-25 has raised eyebrows. Particularly as it follows a strong 20 per cent growth in 2023-24.
But, is credit growth slowing down? Should policy makers be worried about it? A businessline analysis of credit growth since the beginning of this century shows the slower growth last fiscal year is not a cause for concern. The growth last fiscal year is in line with the average growth recorded between 2011 and 2025. The growth is also in line with the growth rate in economy. A more sedate credit growth could be more sustainable, indicating more stable financial conditions.
Credit growth in the last 25 years
Gross bank credit growth in India has been far from consistent. In the early 2000s, credit growth experienced robust expansion, soaring to a peak of 34.86 per cent in 2006. This surge coincided with a period of strong economic growth as animal spirits were unleashed and private capital investment surged, supported by bank credit. The growth was reined a little in the aftermath of the 2008 global financial crisis. The decade from 2010-2020 was marked by distinct phases. In the early part of the decade, banks became risk-averse, grappling with the mounting bad loans. They continued to focus on repairing their balance sheets in the middle part of the decade, constraining the credit growth, which subsequently remained between 8 and 13 per cent. Towards the end of the decade, the banking system faced additional pressures due to the liquidity crisis in 2019.
The economic disruptions caused by Covid-19 led to significant slowdown in credit growth to 4.97 per cent in 2021. The stimulus package unveiled by the RBI during the pandemic, including the credit guarantee scheme for MSMEs led to a revival in credit growth in 2022. The sharp surge in retail credit due to the influx of digital lending companies also contributed to the post-pandemic surge in bank lending.
The decline in credit growth in 2024-25 to 11.01 per cent, down 9 percentage points compared with 2023-24, is due to regulatory tightening on retail loans, increase in interest rates as well slowing consumption.
The optimal credit growth
How does the growth in 2024-25 compare with historic data? Credit growth fluctuated in a wide band between 4.9 per cent and 35 per cent between 2000 and 2025. The compound average growth rate for total bank credit over the last 25 years has been 16.2 per cent. While growth in food credit clocked a lower 1.5 per cent growth rate, CAGR for non-food credit was 16.5 per cent. But it needs to be noted that we had a particular high growth phase in the first decade of this century, when the CAGR in total bank credit was 22 per cent.
The CAGR for credit growth between 2011 and 2025 was a much more subdued 12 per cent. This appears to be a more rational growth rate for bank credit over the long term. The credit growth of 11.01 per cent in FY25 compares quite favourably with the credit growth over the last 15 years.
Credit to GDP ratio
Another way to gauge the credit growth would be to measure it against the nominal GDP growth rate. This ratio measures how closely the financial system is growing alongside the economy. Literature suggests that in a developing nation like India, the optimum value of the ratio is between 1 and 1.3.
A value in the optimal range indicates that bank credit has expanded at a rate that fuels investment and consumption in the economy. Whereas, if the ratio becomes too high it’s an indicator that the credit growth is expanding too fast. In the last two decades, whenever the ratio moved above 2, as witnessed in early 2000s, it has led to excesses in bank lending to vulnerable segments, malpractices in the lending processes etc. High credit-to-GDP ratios have been followed by regulatory clampdowns as witnessed in 2024.
Current credit to GDP ratio of 1.13 is in the ideal range. It seems to indicate that the slowdown in bank credit is in line with slowing economic conditions.
The Influence of Monetary Policy
The RBI uses repo rates as a tool to manage liquidity and flow of credit. The data reveals a clear trend: lower repo rates generally spur bank credit, though the credit typically responds with a time lag. In the early 2000s, when credit growth was high, the repo rates remained low, at around 5.5 per cent. Elevated repo rates in the subsequent years were followed by sustained cuts. Notably, during the 2008 crisis, a fall in repo rates to 5 per cent following a period of 7.75 per cent encouraged economic activity.
Visually, the repo rate changes often correlate with the Credit-to-GDP Ratio too. When repo rates are lower, more borrowing increases credit uptake, hence increasing the ratio. However, the relationship wasn’t always so direct. During the Non-Performing Assets (NPA) crisis in the mid-2010s, for example, banks pulled back lending despite low repo rates.
The RBI’s continuous calibration of repo rates highlights the challenges in balancing economic growth and financial stability. In 2025, though, the repo rate of 6.25 per cent has yielded an optimum Credit-to-GDP Ratio of 1.13, while economic growth has remained stable.
(Vedant Sriram is an intern with businessline)